Dollar atop one-year peak as Powell sends yields up
The US dollar extended its broad rally early on Friday, towering at one-year highs as a hawkish turn from the Federal Reserve chief sent short-term Treasury yields higher, leaving Wall Street futures in the red and most Asia markets struggling.
Fed Chair Jerome Powell said there was no need to rush rate cuts with the economy still growing, the job market solid and inflation still above the 2.0 per cent target, tempering expectations for a rate cut next month.
Fed fund futures for next year slumped with December off 7 ticks and imply just 71 basis points of rate cuts by end-2025. A rate cut next month is no longer a high probability event, with just 61 per cent priced in, down from 82.5 per cent in the prior session.
That lifted the dollar across the board, especially against the euro as expectations for more aggressive policy easing in Europe further undermined the single currency already trading at one-year lows.
On Friday, Nasdaq futures fell 0.4 per cent while S&P 500 futures eased 0.3 per cent. EUROSTOXX 50 futures fell 0.5 per cent.
MSCI’s broadest index of Asia-Pacific shares outside Japan was off 0.1 per cent and down 4.6 per cent for the week, the biggest weekly loss in more than two years.
Tokyo’s Nikkei, however, gained 1.1 per cent driven by a pull back in the yen, which boosted the outlook for Japanese exporters. Still, it was down 1.3 per cent for the week.
Even before Powell spoke, producer prices data showed that the core gauge surprised slightly to the upside, which also had markets worried about the pace of easing ahead.
Goldman Sachs now sees a greater risk that the Fed could slow the pace of easing sooner, possibly as soon as the December or January meetings, while JPMorgan still tips the Fed to cut in December though they expect the central bank could dial down the easing pace in January.
“After the sugar hit of Trump’s election and its subsequent impacts on expectations for company profits, the market’s enthusiasm is being watered-down by greater interest rate uncertainty, especially going into next year,” said Kyle Rodda, a senior analyst at Capital.com.
Short-term Treasury yields shot up overnight and remained elevated on Friday. The two-year yields held at 4.36 per cent, having jumped six basis points overnight to close at 4.357 per cent.
In the currency markets, the dollar towered against its major peers at a one-year top. It gained for five days on the yen, up another 0.2 per cent to 156.56, the highest since July.
The euro nursed heavy losses at $US1.0529 ($A1.6310) and is set for a hefty weekly loss of 1.77 per cent. Minutes of the latest meeting from the European Central Bank showed the cut last month was likely an insurance move.
Markets are, however, more dovish on the ECB and see a decent 36 per cent chance it could step up its easing in December with a half-point move to guard against growth risks. They are also wagering that the ECB will have to cut at each meeting until mid next year.
The lofty dollar pressured commodity prices, with gold prices down 4.4 per cent this week to $US2,566.45 ($A3,975.53), bringing the monthly loss so far to a sizeable 8.0 per cent.
Oil are also down for the week. Brent crude futures are set for a weekly loss of 2.1 per cent and were last at $US72.33 ($A112.04) a barrel.
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